Monday, April 4, 2011

Central Banks on Deck - Apr 4

Central Banks on Deck
April 4th, 2011

This week foreign exchange markets will be focused on central bank announcements coming from both the European Central Bank (ECB) and the Bank of England (BOE).  Both will make their announcements on Thursday, with the BOE expected to announce no change (steady at 0.50%) at 7am EST, and the ECB expected to hike rates by 25bps to 1.25% at 7:45am EST.  If the banks act as expected, it will be a historically significant move, since major European central banks have not pre-empted the Federal Reserve in raising rates since 1971.

Continental Europe

ECB President Jean-Claude Trichet has been priming markets for the first rate hike in nearly three years, signaling the bank will be vigilant in its mandate to maintain price stability, taking priority over its secondary goal of promoting growth.  Expectations that the ECB will be the first to start raising rates have helped the euro currency realize its strongest first-quarter since the international currency was born in 1999. 

The move to tighten monetary policy will highlight a problem faced by the international currency, as some of the bigger and stronger economies like Germany face possible overheating, while the nations on the periphery (now commonly known as the PIIGS) face intense budgetary pressures and high unemployment.  While the most recent European unemployment reading came out at 9.9%, in Spain it is over 20%, the highest in the Eurozone. 

The United Kingdom

Despite CPI readings above 4.4%, and unemployment at 8%, the BOE is not expected to raise rates from the currently highly accommodative 50bps.  The market had recently viewed the BOE as the most likely to start raising rates, but after the last statement from the Monetary Policy Committee it was revealed that the vote was 6-3 against a rate hike. 

-Jaime Macrae, CIM
Account Executive, Friedberg Mercantile Group

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